And we will change your tax forever, no need to delay ya... nothing's gonna stop us now

UK MPs have ignored calls to delay the implementation of IR35 tax reforms by two years meaning the off-payroll legislation remains set to come into force on 6 April 2021.

MPs were due to vote on the amendment yesterday afternoon, but enough of them declined that the postponement had no chance of attaining a House majority, so the Commons skipped the vote altogether.

What is IR35?

IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities as part of the a crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

The new rules require assessing whether the contractors meet HMRC's definition of self-employment - criticised by many techie contractors as being variable and difficult to comply with. The controversial Check Employment Status For Tax (CEST) tool provided by the taxman for the purpose has also been criticised by freelancers for giving different results at different times, being susceptible to being "gamed", and for excluding "mutuality of obligation" - the concept that the company is obliged to provide work and the contractor to accept it (which would make them more of an employee).

Critics say that being inside IR35 is essentially "no-rights employment," meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment, such as holiday or sick pay, pension, or parental leave. Contractors within IR35 can be hired and fired at will and without reason. On the other hand, some have argued, many are using self-employed tax schemes to avoid tax attracted by their hardworking co-workers.

The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area has been described as an "utter shambles."

The reforms are set to make medium and large-sized businesses responsible for determining the employment status of contractors for tax purposes, rather than the contractors themselves doing so. Many UK-based companies have put in place blanket-ban policies for techies who are employed via their own personal service companies (PSCs).

The IR35 rules are designed to make contractors who are essentially "disguised" staffers pay similar income tax and national insurance contributions to employees – but without the same holiday and sick pay benefits. Affected techie contractors have argued the assessments are not always accurate and risk scaring firms away from hiring freelancers for fear of the complexities involved. Yet others complain they're being pushed into umbrella companies and PAYE situations, with an "effective pay cut of up to 30 per cent". These issues have led to considerable frustration in the community.

MPs did not vote on an amendment to delay introducing the changes until April 2023, despite the April publication of a House of Lords report which called for a complete rethink of the proposed legislation.

At the time, Lord Forsyth of Drumlean, chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said: "Our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences."

In Parliament yesterday, David Davis, Conservative MP for Haltemprice and Howden, who proposed the amendment, urged the government to implement the Taylor review [PDF] proposals to the tax system, which the Lords report recommended.

"Treasury has neither the time nor the capacity for a wholesale review. Therefore, the only sensible course of action is to pause these reforms and take the time to properly review the impact they'll have on the self-employed."

Davis said the review would give the government the chance to "consider tax, rights and risks together, as they should be".

Since the government announced the reforms to the legislation, which were set to be introduced this year before they were delayed, many corporations have effectively banned use of PSCs instead of risking being financially liable for a tax bill should their contractors be deemed in scope of IR35. Big banks such as Barclays, Lloyds, RBS, Deutsche Bank, and HSBC, as well as pharma giant GSK and defence titan BAE Systems have taken such decisions.

Other businesses have slipped back into the old ways, using contractors via PSCs. This includes Fujitsu, Deutsche Bank, Capgemini, National Grid, Asda, Bupa, Tesco and Jaguar Land Rover.

Jesse Norman MP, financial secretary to the Treasury, told MPs the government would not consider delaying implementation of IR35 reforms. "A delay would have very significant drawbacks. It would not address the intrinsic unfairness of taxing two people differently for the same work, it would extend the disparity between the private and the public sectors, and it would come with a significant fiscal cost, which other taxpayers up and down the country would have to make up," he said.

Seb Maley, CEO of IR35 tax advisory firm Qdos, said he was not surprised the government had refused to listen to calls for a delay. "It has buried its head in the sand when it comes to IR35, continually ignoring compelling arguments that call for a rethink of the legislation. The coronavirus crisis also means raising tax receipts has become a priority for the Treasury - even if that means contractors may be wrongly forced into 'zero-rights employment' as a result of the reforms."

The Finance Bill, which contains the reforms to IR35, now moves to the committee stage within Parliament. ®